The Demand for Imports and Exports in the World Economy

W. Charles Sawyer, Richard L. Sprinkle

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138349643
• eBook ISBN: 9780429790430
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1999, this volume responds to one of the more important issues in applied international economics: the extent to which trade flows adjust to changes in income, relative prices and exchange rates. This work surveys the literature on empirical estimation of the demand for imports and exports for the US. The book is designed to be a reference book for both academic international economists and international trade practitioners in government, international organisations and the private sector.

1 Introduction

One of the oldest areas of empirical analysis in international economics is the examination and estimation of income and price elasticities of the demand for imports and exports. Estimates of the response of imports and exports to changes in these variables are important for several reasons. The income elasticity of the demand for imports and exports is of interest to researchers and policy makers in that these estimates describe how imports or exports respond to changes in domestic (foreign) economic activity (GDP).

Analogously, price elasticities are important in describing how trade flows between countries respond to changes in domestic prices relative to foreign prices. These price elasticities become critical variables when policies related to multilateral tariff reductions are negotiated under the auspices of GATT/WTO, and when bilateral tariff reductions are negotiated under various regional free-trade area agreements. In addition, these price elasticities are critical in estimating the effects of preferential tariff reductions such as the Generalized System of Preferences (GSP) and the Caribbean Basin Initiative (CBI).

Further, in a world of floating exchange rates, the elasticity of trade flows in response to changes in the exchange rate is of obvious interest. Finally, these elasticities and the impact of international trade are becoming of increasing importance the world economy. Imports and exports as a percentage of world output has been increasing for decades and shows no signs of abating.

Orcutt’s (1950) seminal paper in this area has been followed by literally hundreds of studies presenting estimates of income and price elasticities for various countries. For researchers using these elasticities, the sheer volume of the literature presents both advantages and challenges. The advantage is that in many cases relevant elasticities for imports and exports have been published for a wide range of countries, and/or products. The difficulty has been that the volume of the literature has grown so large that finding empirical estimates which best fit the purpose at hand can be a rather tedious process. The solution in many cases has been to rely on two previously published surveys of the import and export demand literature.

The most frequently cited surveys covering elasticities for international trade are by Stern, Francis, and Schumacher (1976) and Goldstein and Khan (1985). Both surveys are among the most widely cited pieces in international trade. Since 1977 these two surveys have been cited nearly 250 times. The former survey is extensive but now suffers from the fact that the elasticities reported are dated. The latter survey also is used frequently as a source of income and price elasticity estimates. However, this work focuses more on data and econometric estimation issues involved in the estimation of import and export demand elasticities rather than surveying the empirical estimates. While this paper is more recent than the previous survey, the results reported are now at best over fifteen years old.

The purpose of this volume is to update the aforementioned surveys. More specifically, this survey reviews the literature on empirical estimates of the income and price elasticities of demand for imports and exports by country which have been published since 1976. This information should be of interest to researchers and policy markers needing a convenient source for estimates. In total, we provide 979 estimates of import and export demand elasticities covering 82 countries. The estimates are presented in a relatively easy-to-use format. Finally, the estimates may also be useful in providing researchers a convenient way to look both at what is currently known and where there are gaps in the literature.

The next chapter of this volume provides a discussion of some of the issues involved in the estimation of the income and price elasticities of the demand for imports and exports. In addition, this chapter contains a discussion of the evolution of the literature over the last 20 years. Chapter 3 contains the empirical estimates from 1976 to date for the demand for imports by country. Chapter 4 contains like estimates for the demand for exports by country. The final chapter contains a summary and concludes with what is known concerning import and export demand elasticities.

2 Econometric Estimation of Trade Elasticities

The econometric modeling of aggregate trade flows has a long history in the economic and applied econometric literature. Beginning in the late 1950s with Cheng (1959), a number of important surveys have been published including Learner and Stern (1970), Magee (1975), Stern et al. (1976) and Goldstein and Khan (1985). One of the reasons for the important amount of published studies is certainly the fact that the underlying theoretical economic framework for the determination of prices and trade volumes is reasonably straightforward and familiar from standard consumer demand or production theory. In addition, the effectiveness of international trade policies is dependent on the size of the price and income effects on trade flows. As such, policy makers have an important interest in reliable estimates of these parameters.

Although the nature of the goods being traded (homogeneous commodities versus differentiated goods); the end-use of the commodity (for final consumption versus an intermediate good); and the geographical distribution of trade are factors which are important in modeling disaggregated trade flows, we restrict our attention to total aggregate trade flows so that the basic underlying economic theory can remain relatively familiar. Traditionally, the basic question of whether imports and exports are perfect substitutes or imperfect substitutes for domestically produced goods has been often debated (see Learner and Stern (1970), Goldstein and Khan (1985)). Since intra-industry trade is usually observed between countries, i.e., a country both imports and exports the same commodity, an imperfect substitutes model is the mainstay of empirical work on modeling trade flows.

The imperfect substitutes model (for more detail, see Goldstein and Khan (1985)) is briefly described below for both imports and exports of a country.

The Imperfect Substitutes Model for Imports

For simplicity, consider a country i’s imports from the rest of the world. The demand for imports by country i from the rest of the world can be represented as follows:

$\begin{array}{ccc}{{\text{M}}_{\text{i}}}^{\text{D}}& =& \text{f}({\text{Y}}_{\text{i}},{\text{PM}}_{\text{i}},{\text{PD}}_{\text{i}})\end{array}$(2.1)

Where M_i^D denotes the quantity of country i’s imports demanded; Y_i denotes the level of money income in country i; PM_i denotes the domestic currency price paid by importers in country i; and PD_f denotes the price of all domestically produced goods within county i. In addition, the domestic currency price paid by importers in country i can be expressed as follows:

$\begin{array}{ccc}{\text{PM}}_{\text{i}}& =& {{\text{PM}}_{\text{i}}}^{*}(1+{\text{T}}_{\text{i}})\text{/XR}\end{array}$(2.2)

Where PM_i* denotes the foreign currency price of country i’s imports (the price of the rest of the world’s exports); T_i denotes the proportional tariff of country i; and XR is the exchange rate defined as units of country i’s currency per unit of the rest of the world’s currency.

The supply of imports from the rest of the world to country i can be represented as:

$\begin{array}{ccc}{{\text{M}}_{\text{i}}}^{\text{S}}& =& g\left({{\text{PM}}_{\text{i}}}^{*}(1+\text{S*}),\text{PD*}\right)\end{array}$(2.3)

Where S* denotes the proportional subsidy rate by the rest of the world on exports to country i, and PD* denotes the foreign currency price of all domestically produced goods in the rest of the world. For notational convenience we have used a simple two country framework which implies symmetry between the demand for imports and the supply of imports such that:

$\begin{array}{ccc}{{\text{M}}_{\text{i}}}^{\text{D}}& =& {{\text{M}}_{\text{i}}}^{\text{S}}\end{array}$(2.4)

The main characteristics of the imperfect substitutes model for imports can be summarized as follows. In accordance with conventional demand theory, the consuming country is postulated to maximize utility subject to a budget constraint. The resulting demand function for imports thus represents the quantity demanded as a function of the level of money income in country i; the imported good’s own price; and the price of domestic substitutes. For aggregate imports the possibility of inferior goods is typically excluded, so the income elasticity f_Y is assumed to be positive. In addition, for aggregate imports the possibility of domestic complements for imports is also excluded, so that the cross-price elasticity, f_PD is assumed to be positive and the own-price elasticity of demand f_PM is of course expected to be negative.

In addition, most researchers assume that the importing country has no money illusion, so that doubling all prices and money income results in no change in the demand for imports, i.e., f_Y + f_PD + f_PM = 0. As such, this homogeneity assumption is normally expressed by dividing the right hand side of the demand function by PD_i so that the demand function becomes:

$\begin{array}{ccc}{{\text{M}}_{\text{i}}}^{\text{D}}& =& \text{f}{({\text{Y}}_{\text{i}}\text{/}{\text{PD}}_{\text{i}},{\text{PM}}_{\text{i}}\text{/}{\text{PD}}_{\text{i}})}^{}\end{array}$(2.5)

The specification of the supply equation indicates that the quantity supplied is a positive function of the own price and a negative function of the price of domestically produced goods in the exporting country. Imposition of homogeneity on the supply function is equivalent to the restriction that -g_PM = g_PD*. Even though the theory of export supply to the importing country is still very much contested and is currently an unresolved subject in empirical trade work, the basic premise underlying the supply function is that the supply of exports to the importing country will increase with the profitability of producing and selling exports.

The advantage of presenting both the supply and demand for imports in the imperfect substitutes model is to make it clear that the relationship between quantities and price is, at least in theory, simultaneous. Despite this fundamental point, the majority of the empirical studies on import trade have addressed the supply side of the market only by assumption. Specifically, the prevailing practice has been to assume that the supply function is infinitely elastic, i.e., g_PM = ∞. The great allure of such an assumption is that it permits satisfactory estimati...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Dedication
• List of Tables
• 1 Introduction
• 2 Econometric Estimation of Trade Elasticities
• 3 The Demand for Imports
• 4 The Demand for Exports
• 5 Summary and Conclusions
• Bibliography